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Liberals Vote Against Studying B-20

“Responsible governments rely on sound data to make their decisions.”

“We will release to the public key information that informs the decisions we make.”

“We will make decisions using the best data available.”

That was the pledge from the Liberal government when it campaigned for your vote. Their buzz phrase was “evidence-based decision making,” but that may have been a hollow pledge, at least on the housing file.

Tom Kmiec, Conservative MP for Calgary Shepard and Deputy Shadow Minister for Finance, is trying to add more data to the debate over OSFI’s Guideline B-20. This rule change, he says, has slashed home sales, weighed on prices in more vulnerable regions, raised urban rents, increased renewal costs for the most vulnerable and set back thousands of Canadians from becoming homeowners. And all of this needs to be quantified.

But more than that, once the market eventually adjusts to B-20, we may be in the same spot we were before B-20, with record-high prices due (largely) to insufficient supply. Then what are policy-makers going to do, hike the stress test another 200 basis points?

Just this week, Statistics Canada stated that “Investment in housing fell 1.9% in the first quarter, the largest decline since the first quarter of 2009.” Unsurprisingly, StatsCan noted the decline in activity coincided with the “new mortgage stress measures introduced nationwide in January.”

A month ago, Kmiec tabled a motion to study the B-20 rule changes. “I moved the motion at committee on Wednesday,” he says. “The Liberals said nothing when given the opportunity to respond to the motion or propose amendments. They simply voted it down straightaway without any commentary whatsoever.”

And it wasn’t the first time his colleagues tried to shed light on the dark implications of OSFI’s policy.

“In a dissenting report [to the Liberal-controlled Finance Committee’s 2017 rule change review], the Conservatives on the Finance Committee recommended [the government] tailor mortgage policy with different regions in mind, not hit everyone across the country with one-size-fits-all solutions, because those don’t work,” Kmiec told CMT.

The Problems at Hand

“The 2% stress test is punishing people,” he argues. “Numerous constituents tell me they’re failing the stress test. Others are trying to renew with their own bank and receiving much higher rates than they could have received elsewhere.” Many of those people could have got a mortgage under the rules that had been in place for years previous.

“What was supposed to dampen risk in Vancouver and Toronto dampens all markets, even markets that didn’t need dampening,” he said. That includes Calgary, Edmonton, Saskatoon, Halifax, many smaller Ontario cities and so on. “OSFI [has said] they implemented the rule changes not to reduce demand, but to protect the banks.”

But falling prices may not protect the banks. Moreover, one hundred thousand potential jobs lost and indebted borrowers turning to high-cost lenders could also end up hurting the banks, even if indirectly.

The Affordability Myth

Many have applauded B-20 for reducing prices, and Kmiec concedes that is happening in many markets, but he notes, “if you can’t qualify for a mortgage, you can’t buy a lower priced house anyway, so how is that helping anybody?”

“People buying at the lower end are being priced out of the market entirely in large urban markets…There are way more people competing for entry level homes…..[OSFI] effectively compressed buyers into one segment of the market,” he added. That doesn’t even speak to soaring rents, spurred by now-shut-out homebuyers.

“[The government] is depressing demand when the problem was supply,” Kmiec says.

And it’s not just about home prices, he adds. It’s also about debt servicing for stress-test flunkies. “If I can’t pass the stress test, I may go to unregulated lenders where the rates are higher and the conditions are detrimental to me.” That, in turn, creates greater risk of insolvency.

We Need More Facts

For the reasons above, B-20 is “worthy of a study by the committee,” Kmiec maintains.

He says he’s never been this concerned about mortgage policy in the past. “With prior rule changes, I used to think, ‘Ho hum they changed the rules again.’ But then I looked at this change, and realized how incredible it is that so many other rules have changed since 2008.”

“I’m not against a stress test in principle,” he says, “but 200 basis points is way too high.” Kmiec believes a market-based spread (independent of the major banks’ posted rates) would be more reasonable, such as one based on forward rates or market forecasts.

“You could also tailor the stress test to [the risk in] certain market segments, or tailor it to term length.” Mortgages with 10-year fixed terms, for example, could be stress tested at their contract rates, given the ability of low-ratio borrowers to refinance higher payments at maturity and earn greater income over the course of a decade.

“If the government’s goal is to protect the banks, then incentivizing longer-term mortgages makes sense,” Kmiec argues.

  1. Government protecting the banks? No, no. The government is protecting itself. CMHC default insurance is a liability of the federal government and, by making mortgage applications almost impossible to process, the feds are limiting their own liability. That’s the name of the game. The feds are limiting their liability here so that they can waste even more money in defence procurement and payroll systems that don’t work.

  2. If the federal government wanted to protect itself as you suggest then it would have just killed or substantially decreased it’s bulk insurance availability. We had a high ratio stress test implemented in 2016 which did barely anything to tame real estate markets. The current stress targets conventional borrowers and is implemented by OSFI whom I believe would have consulted with the banks as they supply the majority of funds for uninsured conventional lending. While I do agree that a more targeted approach for specific markets would have made more sense rather than a broad stroke approach, there is always a risk that the contagion of rapid price speculation would have spread to surrounding markets since capital is mobile. No question something had to be done but there is definitely no easy answer as to what. We’ll just have to wait and see.

  3. Anyone calling themselves a conservative who is lobbying against financial responsibility is a liar — they’re no conservative. B-20 is basic fiscal responsibility.

    Interest rates aren’t 2% below historical norms, they’re closer to 6% below historical norms. If a simple 2% bump is enough to push you outside of buying that home, bad news: you can’t afford that home.

    Global growth is up, inflation is on the rise, central bank rates and mortgage rates are going to rise. If you ignore those facts today, you’re going to lose everything when you go to renew.

    If you’re going to an “alternative lender” because the bank turned you down, that isn’t proof the policy is wrong. It’s proof that some people are so irresponsible they literally cannot be stopped from making unimaginably bad decisions. It’s proving the regulator right. Our banking system must be protected from someone so irresponsible. Such idiots tend to demand to be made whole for their mistakes with money out of my pocket. Let their sketchy “alternative lender” shoulder that risk, rather than the taxpayer backstopped mainstream banking system.

  4. Peter Dale – Protecting itself from what? A 1/4% default rate? Give us a break. CMHC already provied it has way more capital than it needs to cover a US equivalent price crash. You know as well as I do that OSFI would have raised insurers’ capital levels again if it thought it had to.

    ICQ – You are totally off base. Bulk insurance is free money for insurers and the government. Every borrower must not only meet all government qualifying criteria but also put up 20 to 35% equity minimum. The average loan to value is 58.5% and only 21.4% of have less than 25% equity. Plus the lender posts at least 2 or 3 times the fair premium for the actual risk. Your comment is total misinformation.

  5. Stats Can did not “attribute” the decline in house prices to the B20 stress test. The actual phrasing from Stats Can was, “Lower resale activity coincided with new mortgage stress measures introduced nationwide in January”. You imply causation, and that’s not what Stats Can is saying at all. Prices are being affected by several factors, including higher rates and a massive shift in consumer sentiment in some high priced urban centres. Only a mortgage broker could justify maintaining historically high and ever increasing house prices and support giving Canadians loans that are 600, 700 percent or more of income. The government is clearly all over the supply issue with the National Housing Strategy.

    1. Why might StatsCan have chosen to acknowledge the stress test in the same paragraph as the housing data? “Attribute” may have been a sub-optimal word (it’s been updated). But in this author’s experience the word “coincide,” or the like, is often the closest StatsCan will come to linking a statistical result to policy, let alone a controversial policy, let alone a policy from the ruling government. And make no mistake, no one is claiming that B-20 is the only cause of housing pressure.

      Regarding your broker dig, surely you can do better than a bush league ad hominem. Or maybe not.

      High/increasing home prices don’t need justification, just like Amazon and Google stock prices need no justification. They simply reflect market forces, some of which are transitory, some of which are long-term. After the “correction,” transitory B-20 adjustment and transitory rate hikes, high/increasing prices will continue — until there is an oversupply of alternatives to high demand markets). And don’t hold your breath on that.

      As for “The government is clearly all over the supply issue with the National Housing Strategy,” that made me spit up my strawberry Quik so please expect a dry cleaning bill. The self-stated “priority” of the liberal’s National Housing Strategy is targeting the low income / less advantaged segment. A deficit-funded redistribution of wealth to hike supply for social housing recipients, homeless, those on reservations, and those “dealing with mental health and addiction issues” (however good intentioned) does little for the majority of overtaxed urban middle class Canadians struggling to afford shelter within a 40-60 minute commute.

    2. Statscan knows as well as anyone that B20 has knocked down sales and detached prices, whether they explicitly say it or not. Obviously other factors are also at play but B-20 is a main reason for the downtrend.

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